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Czech Lawmakers Endorse Deficit-Cut Plan as Recession Lasts

Czech lawmakers approved the 2013 draft budget in a first reading, endorsing the government’s plan to cut the fiscal deficit as the economy faces the risk of the longest recession on record.

Seventy-nine of the 152 deputies present voted to lock in revenue and spending levels, setting the public-finance deficit ceiling at 2.9 percent of economic output, before the draft goes to second and third readings where individual items may be amended. The plan is part of Prime Minister Petr Necas’s goal of narrowing the gap to less than the European Union’s 3 percent limit for the first time since 2008, when Lehman Brothers Holdings Inc. collapsed.

Necas is sticking to deficit cuts even as the economy struggles to exit a yearlong recession. The government, which has staked its existence in several votes on trimming the gap, credits its fiscal strategy with helping to reduce borrowing costs to record lows. Austerity measures, including tax increases, have also curbed household demand. The Cabinet expects a return of economic growth in 2013.

“I have nothing against applying counter-cyclical fiscal policy, which should even out economic cycles,” Finance Minister Miroslav Kalousek said today. “But we have no other option than to propose a pro-cyclical budget in order to fulfill the government’s priority of deficit reduction, which is aimed at securing the Czech Republic’s sovereignty and independence on financial markets.”

The koruna appreciated 0.3 percent to 25.253 per euro at 5:18 p.m. in Prague. Yields on five-year government bond fell 3 basis points, or 0.03 percentage point, to 0.802 percent, according to data compiled by Bloomberg.

The plan assumes 0.7 percent economic growth next year, compared with the central bank’s forecast of 0.2 percent. The government’s estimate carries “downside risks,” Kalousek said on Nov. 26

Austerity Measures

The deficit limit for the central state budget, which is the biggest part of public finances, is set at 100 billion koruna ($5.1 billion), 5 billion koruna less than this year’s target. The Finance Ministry estimates gross borrowing needs at 228 billion koruna in 2013 and expects sales of domestic medium-and long-term bonds totaling 146 billion koruna. It may also sell foreign bonds totaling an equivalent of 50.4 billion koruna next year, according to the budget draft.

The Cabinet has cut investment, raised the sales tax and curbed spending on public wages since taking power in 2010. The budget shortfall narrowed to 3.3 percent of gross domestic product last year from 4.8 percent in 2010. The Finance Ministry estimates the gap at 3.2 percent this year excluding the one-time accounting impact of a church restitution deal, which it sees boosting the deficit to about 5 percent.

Weakening domestic demand is taming inflation, which pushed the central bank to cut rates to effectively zero and prompted talk of weakening the currency should the economy require more policy easing.

The government pushed through this month a fiscal package including further increases in sales levies and a new tax rate for highest earners, with the central bank estimating the measures to slow economic growth by about 0.8 percentage point next year through lower real household consumption.

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